PAW PAW LAKE REGIONAL JOINT SEWAGE DISPOSAL BOARD FINANCIAL REPORT

Transcription

1 PAW PAW LAKE REGIONAL JOINT SEWAGE DISPOSAL BOARD FINANCIAL REPORT March 31, 2016

2 FINANCIAL REPORT March 31, 2016 CONTENTS MANAGEMENT S DISCUSSION AND ANALYSIS... I-III INDEPENDENT AUDITOR S REPORT BASIC FINANCIAL STATEMENTS: Statements of Net Position... 3 Statements of Revenues, Expenses, and Changes in Net Position... 4 Statements of Cash Flows... 5 Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION: Schedule of Employer s Contribution Schedule of Changes in the Employer s Net Pension Liability and Related Ratios SUPPLEMENTARY INFORMATION: Statements of Revenues, Expenses and Changes in Net Position - Budget and Actual OTHER REPORTS: Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Page

3 Management s Discussion and Analysis About the Facility The Paw Paw Lake Regional Joint Sewage Disposal Board (the Joint Board ) serves the Coloma and Watervliet regional area with wastewater treatment services. The Joint Board was established in January 1971 as a not-forprofit, tax-exempt organization when the cities and townships of Coloma and Watervliet agreed to jointly acquire, own and operate a sewage treatment and disposal facility. Act 129 of Michigan Public Acts of 1943 is the state legislation authorizing the municipalities to establish the Joint Board. The Joint Board was established to control, manage, and operate the joint sewage facility. The Joint Board consists of an appointed representative from each of the four municipalities. Ownership of the infrastructure passed to the municipalities in May of 1993 when the related construction debt was retired. The Joint Board provides wastewater treatment services to the cities and townships of Coloma and Watervliet. The connected service population is approximately twelve thousand. Treatment capacity of the facility is 2.5 million gallons per day. For the fiscal year ended March 31, 2016, the Joint Board treated an average flow of 830 thousand gallons per day. Usage, listed by gallons processed, by municipalities during the fiscal year, is as follows: Financial Highlights Overview of the Financial Statements Year ended March City of Coloma 38,339,707 38,264,225 Coloma Township 96,952, ,958,100 City of Watervliet 82,870,687 69,486,000 Watervliet Township 100,729,142 93,128,688 Total 318,891, ,837,013 The Joint Board's total net position was $1,475,622 at March 31, 2016, of which $1,130,628 was the net investment in capital assets. At March 31, 2015, the Joint Board's total net position was $1,850,786 of which $987,174 was the net investment in capital assets. The Joint Board s total operating revenues exceeded operating and administrative expenses for the fiscal year ended March 31, Total operating expenses were $789,742 and $684,442 for the years ended March 31, 2016 and Operating revenues were $843,439 and $767,461 for the years ended March 31, 2016 and This report consists of three parts - Management s Discussion and Analysis (this section), the basic financial statements, and supplementary information. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. I

4 Management s Discussion and Analysis Condensed Financial Information The following table represents condensed information about the Joint Board s financial position for the past two fiscal years. Total net position increased by $375,164. Year Ended March Current assets $ 613,246 $ 681,682 Capital assets 1,890,628 1,595,174 Long-term investments 288, ,454 Deferred Outflows - Pension 112,284 - Total Assets $ 2,904,839 $ 2,561,310 Current liabilities $ 172,745 $ 178,524 Long-term debt 1,256, ,000 Total Liabilities $ 1,429,217 $ 710,524 Net position: Invested in capital assets $ 1,130,628 $ 987,174 Unrestricted 344, ,612 Total Net Position $ 1,475,622 $ 1,850,786 Operating Income and Expenses Total Liabilities and Net Position $ 2,904,839 $ 2,561,310 The following table represents condensed financial information about the Joint Board s revenues and expenses. The net income was $48,862 and $99,435 for the years ended March 31, 2016 and 2015, respectively. Results of Operations Year ended March Operating revenues $ 843,439 $ 767,461 Operating expenses 789, ,442 Operating profit $ 53,697 $ 83,019 Interest expense (17,855) (19,220) Investment income (loss) 13,020 35,636 Net income $ 48,862 $ 99,435 Operating revenues from the municipalities increased by $75,978. This is due to an increase in water flow used by the municipalities during the prior year. Operating expenses increased by $105,300. II

5 Management s Discussion and Analysis Capital Assets and Debt Administration Ownership of the infrastructure passed to the municipalities in May of 1993 when the related construction debt was retired. Capital assets include the equipment, building, land, and vehicles. The capital plan is directed toward maintaining the existing facilities. Major capital asset events during the current fiscal year included the following: Planned major additions to capital assets include replacement of the primary clarifiers. Bids for construction were submitted and accepted in Construction was planned to be completed by the end of next year, and was completed as scheduled. Long-Term Debt In February 2016, the Joint Board paid off the original promissory note and signed a new promissory note for $760,000 for construction and plant improvement costs. The note was for 10 years with principal payments due semi-annually and interest payments due semi-annually. Budget Variances The 2016 fiscal year ended with actual operating revenue higher than budgeted income by $45,139. Actual operating expenses were lower than budgeted amounts by $328. Significant variances include: Nonoperating expense of $4,835 was not budgeted. Operating supplies and services of $161,421 were over the budget by $8,421. Utilities of $59,956 were under the budget by $16,044 Repairs and maintenance costs of $10,704 were under the budget amount by $19,296. Debt payments of $76,000 were budgeted. However, for financial statement purposes the payment of this amount reduces the Note Payable liability rather than being expensed. Capital expenditures amounted to $372,454. Contacting the Joint Board s Management The purpose of this management s discussion and analysis is to provide an overview of the current and prospective financial condition of the Joint Board s operations and physical assets. Questions concerning this report may be directed to Mr. Joseph Stepich, Joint Board President. III

6 July 22, 2016 INDEPENDENT AUDITOR S REPORT To the Joint Board Paw Paw Lake Regional Joint Sewage Disposal Board Coloma, Michigan We have audited the accompanying financial statements of the business-type activities of the Paw Paw Lake Regional Joint Sewage Disposal Board as of and for the year ended March 31, 2016, and the related notes to the financial statements, which collectively comprise the Board s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.. 1

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8 Statements of Net Position Assets Current Assets: Cash 322,308 March 31, $ $ 340,068 Accounts receivable 81,167 76,569 Short-term investments 205, ,130 Prepaid insurance 4,140 9,915 Total Current Assets $ 613,246 $ 681,682 Noncurrent Assets: Long-term investments $ 288,681 $ 284,454 Caital assets: Nondepreciable 23,408 42,458 Depreciable, net of accumulated depreciation 1,867,220 1,552,716 Total Noncurrent Assets $ 2,179,309 $ 1,879,628 Total Assets $ 2,792,555 $ 2,561,310 Deferred Outflows of Resources Deferred Outflows - Pension Note 6 $ 112,284 $ - Total Assets and Deferred Outflows of Resources $ 2,904,839 $ 2,561,310 Liabilities Current Liabilities: Accounts payable $ 7,536 $ 7,491 Note payable, due within one year - NOTE 4 67,248 76,000 Salaries and wages 3,650 6,241 Accrued vacation 13,179 9,828 Accrued sick leave 74,731 73,991 Payroll taxes 1,359 1,210 Retirement plan payable 5,042 3,763 Total Current Liabilities $ 172,745 $ 178,524 Noncurrent Liabilities: Note payable - NOTE 4 $ 692,752 $ 532,000 Net pension liability 563,720 - Total Noncurrent Liabilities $ 1,256,472 $ 532,000 Total Liabilities $ 1,429,217 $ 710,524 Net Position Net investment in capital assets $ 1,130,628 $ 987,174 Unrestricted 344, ,612 TOTAL NET POSITION $ 1,475,622 $ 1,850,786 The accompanying notes are an integral part of these financial statements. 3

9 Statements of Revenues, Expenses, and Changes in Net Position For the Year Ended March 31, Operating Revenues: Total Operating Revenues $ 843,439 $ 767,461 Operating Expenses: Salaries and benefits $ 421,071 $ 370,327 Services and supplies 161, ,419 Insurance 27,008 27,710 Repairs and maintenance 10,704 18,313 Other operating expenses 169, ,673 Total Operating Expenses $ 789,742 $ 684,442 Operating Income (Loss) $ 53,697 $ 83,019 Nonoperating Income and Expenses: Interest expense $ (17,855) $ (19,220) Interest income 1,013 1,123 Investment income 5,050 5,209 Unrealized gain (loss) on investment 6,957 29,304 Total Nonoperating Income and Expenses $ (4,835) $ 16,416 Change in Net Position $ 48,862 $ 99,435 Net Position - Beginning of Year $ 1,850,786 $ 1,751,351 Prior Period Adjustment - NOTE 8 (424,026) - Adjusted Net Position - Beginning of Year $ 1,426,760 $ 1,751,351 NET POSITION - END OF YEAR $ 1,475,622 $ 1,850,786 The accompanying notes are an integral part of these financial statements. 4

10 Statements of Cash Flows For the Year Ended March 31, Cash Flows From Operating Activities: Cash received from customers $ 838,841 $ 801,373 Cash payments to suppliers for goods and services (276,752) (271,888) Cash payments to employees for services (399,832) (378,132) Net Cash Provided by Operating Activities $ 162,257 $ 151,353 Cash Flows From Investing Activities: Investment income $ 6,063 $ 6,332 Change in market value of investments 6,957 29,304 Net proceeds (purchase) of investments 45,272 (27,400) Net Cash Provided by Investing Activities $ 58,292 $ 8,236 Cash Flows From Capital and Related Financing Activities: Cash payments for the purchase of equipment $ (372,454) $ (40,585) Proceeds from loan 760,000 - Principal paid on debt (608,000) (87,362) Payment of debt related interest (17,855) (19,220) Net Cash Used in Capital and Related Financing Activities $ (238,309) $ (147,167) Net Increase (Decrease) in Cash $ (17,760) $ 12,422 Cash at Beginning of the Year 340, ,646 CASH AT END OF THE YEAR $ 322,308 $ 340,068 Reconciliation of operating income (loss) to net cash provided (used) by operating activities: Operating Income (Loss) $ 53,697 $ 83,019 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 77,000 72,981 (Increase) decrease in accounts receivable (4,598) 33,912 (Increase) decrease in engineering deposit - 7,500 (Increase) decrease in prepaid insurance 5,775 (5,929) Increase (decrease) in accounts payable 45 (41,993) Increase (decrease) in accrued liabilities 2,928 1,863 Increase (decrease) in pension expense 27,410 - Net cash provided by operating activities $ 162,257 $ 151,353 Noncash Operating, Capital and Investing Activities - during the year, there were no noncash activities. The accompanying notes are an integral part of these financial statements. 5

11 Notes to Financial Statements March 31, 2016 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Paw Paw Lake Regional Joint Sewage Disposal Board ( the Joint Board ) conform to accounting principles generally accepted in the United States of America as applicable to governmental units. The following is a summary of significant accounting policies. A. Reporting Entity The Paw Paw Lake Regional Joint Sewage Disposal Board is a joint venture of the cities of Coloma and Watervliet and the townships of Coloma and Watervliet, Michigan, and was created pursuant to Public Act 129, Michigan Public Acts of Its allowed purpose is to acquire and operate a sewage disposal system. The budget for the authority is approved by the Joint Board. The accompanying financial statements have been prepared in accordance with criteria established by the Governmental Accounting Standards Board for determining the various governmental organizations to be included in the reporting entity. Based on the significance of any operational or financial relationships with the Joint Board, there are no component units to be included in the Joint Board s financial report. The Internal Revenue Service has ruled that the Joint Board is a political subdivision of the State of Michigan and, as a result, is exempt from federal income tax. B. Basis of Accounting, Measurement Focus, and Financial Statements Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurements made, regardless of the measurement focus applied. The financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of timing of related cash flows. Grants and similar items are recognized as revenues as soon as all eligibility requirements imposed by the provider have been met. The Joint Board reports three categories of net position, as follows: Net Investment in Capital Assets - consists of net capital assets reduced by outstanding balances of any related debt obligations and deferred inflows of resources attributable to the acquisition, construction, or improvement of those assets and increase by balances of deferred outflows of resources to those assets. Restricted Net Position - Net position is considered restricted if their use is constrained to a particular purpose. Restrictions are imposed by external organizations such as federal or state laws or buyers of the Joint Board's bonds. Restricted net position is reduced by liabilities and deferred inflows of resources related to the restricted assets. Unrestricted Net Position - consists of all other net position that does not meet the definition of the above two components and is available for general use by the Joint Board. 6

12 Notes to Financial Statements March 31, 2016 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued C. Operating Revenue and Nonoperating Revenue Operating revenue represents billings to municipalities based on flow rates metered by the Joint Board as well as charges to local businesses for industrial processing. Operating expenses include the cost of sales and services, administrative expense and depreciation on capital assets. Nonoperating revenue includes other revenue, such as investment income, that does not directly fund general operations of the plant. D. Cash and Cash Equivalents For purposes of the statement of cash flows, the Joint Board considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. E. Capital Assets Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to operations as incurred and major renewals and betterments are capitalized. Depreciation is recorded on the straight-line method over the estimated useful lives. Capital assets are defined by the Joint Board as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of one year. Buildings Equipment Vehicles Office equipment 40 years 5-20 years 5 years 5-10 years F. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 2 - DEPOSITS AND INVESTMENTS Michigan Compiled Laws authorize the Joint Board to make deposits and invest in the accounts of federally insured banks, credit unions, and savings and loan associations which have an office in Michigan. The Joint Board is allowed to invest in bonds, securities and other direct obligations of the United States or any agency or instrumentality of the United States; United States government or federal agency obligations; repurchase agreements; bankers acceptance of United States banks; commercial paper rated within the two highest classifications which matures not more than 270 days after the date of purchase; obligations of the State of Michigan or its political subdivisions which are rated as investment grade; and mutual funds composed of investment vehicles which are legal for direct investment by local units of government in Michigan. The Joint Board has designated six financial institutions for the deposit of its funds. The investment policy adopted by the Joint Board in accordance with Public Act 196 of 1997 has authorized investment in bonds and securities of the United States government and bank accounts and CDs, repurchase agreements, and bankers acceptances. The Joint Board s deposits and investment policy are in accordance with statutory authority. 7

13 Notes to Financial Statements March 31, 2016 NOTE 2 - DEPOSITS AND INVESTMENTS - Continued Investments are presented in the financial statements at fair market value. All investments are considered temporary. Premiums and discounts are not amortized. Interest is accrued on investments. For the year ended March 31, 2016, investment income and losses consisted of interest and dividend income of $5,050, no proceeds from sales of investments, no realized gains or losses, and an unrealized gain of $6,957. The Joint Board s cash and investments are subject to several types of risk, which are explained in more detail below. Custodial Credit Risk of Bank Deposits - Custodial credit risk is the risk that in the event of a bank failure, the Joint Board s deposits may not be returned to it. The Joint Board does not have a deposit policy for custodial credit risk. The Joint Board evaluates each financial institution with which it deposits funds and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. At year-end, all of the Joint Board s bank deposits (certificates of deposit, checking and savings accounts) were fully insured. Custodial Credit Risk of Investments - Custodial credit risk is the risk that in the event of the failure of the counterparty, the Joint Board will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The Joint Board does not have a policy for custodial credit risk. At year-end, approximately $288,681 of investment securities were held by an investment company. Interest Rate Risk - Interest rate risk is the risk that the value of investments will decrease as a result of a rise in interest rates. The Joint Board s investment policy does not restrict investment maturities other than commercial paper which can only be purchased with a 270-day maturity. At year-end, the maturities of investments are as follows: Maturity Less than One to Five Investment Fair Value One Year Years GNMA guaranteed pass through certificates $ 15,607 $ - $ 15,607 Governmental and agency securities 194, ,182 Municipal bonds 78,892-78,892 Certificates of deposit 205, ,631 - Total Investments $ 494,312 $ 205,631 $ 288,681 Credit Risk - State law limits investments in commercial paper to the top two ratings issued by nationally recognized statistical rating organizations. The Joint Board has no investment policy that would further limit its investment choices. At year-end, the Joint Board held no debt securities other than U.S. government or U.S. government agency securities. 8

14 Notes to Financial Statements March 31, 2016 NOTE 3 - PROPERTY, PLANT, AND EQUIPMENT A summary of changes in property, plant, and equipment for the year ended March 31, 2016 was as Balance Balance April 1, 2015 Additions Disposals March 31, 2016 Nondepreciable Capital Assets: Land $ 23,408 $ - $ - $ 23,408 Construction in process 19,050 - (19,050) - Total Nondepreciable Capital Assets $ 42,458 $ - $ (19,050) $ 23,408 Depreciable Capital Assets: Building and leasehold improvements $ 363,659 $ - $ - $ 363,659 Equipment 1,586, ,504-1,978,330 Vehicles 34, ,082 Office equipment 32, ,019 Total Depreciable Capital Assets $ 2,016,586 $ 391,504 $ - $ 2,408,090 Less Accumulated Depreciation for: Building and leasehold improvements $ (144,369) $ (9,274) $ - $ (153,643) Equipment (255,137) (67,124) - (322,261) Vehicles (34,082) - - (34,082) Office equipment (30,282) (602) - (30,884) Total Accumulated Depreciation $ (463,870) $ (77,000) $ - $ (540,870) Total Depreciable Capital Assets, Net of Accumulated Depreciation $ 1,552,716 $ 314,504 $ - $ 1,867,220 Total Capital Assets, Net of Accumulated Depreciation $ 1,595,174 $ 314,504 $ (19,050) $ 1,890,628 Depreciation expense for the year ended March 31, 2016 was $77,000. 9

15 Notes to Financial Statements March 31, 2016 NOTE 4 - CHANGES IN LONG-TERM DEBT Long-term debt at March 31, 2016 is comprised of the following individual issues: $760,000 Sanitary Sewer Improvements Promissory Note, Series 2016, without collateral, through Chemical Bank for plant improvements. Principal due in semi-annual installments, beginning February 1, 2016, with interest at 2.99% per annum, due semi-annually on August 1 and February 1. Balance Balance Due within April 1, 2015 Additions Reductions March 31, 2016 One Year $ 608,000 $ 760,000 $ (608,000) $ 760,000 $ 67,248 Total Long-Term Debt $ 608,000 $ 760,000 $ (608,000) $ 760,000 $ 67,248 Interest expense for the year ended March 31, 2016 was $17,855. Vacation pay is earned depending upon years of service and is payable upon termination. Sick leave benefits represent only that amount that would be payable should employees use the benefit. Unused sick pay will not be reimbursed upon termination. The schedule of debt outstanding, including interest payments of $114,547, are as follows: NOTE: Old note paid off and replaced with new note, schedule adjusted to reflect changes. NOTE 5 - RISK MANAGEMENT Year Ending March 31, Debt Interest Total 2017 $ 67,248 $ 21,242 $ 88, ,274 19,216 88, ,361 17,130 88, ,511 14,980 88, ,725 12,765 88, ,881 29, ,095 $ 760,000 $ 114,547 $ 874,547 Insurance - The Joint Board is exposed to various risks of loss related to property loss, torts, errors and omissions and employee injuries (workers compensation), as well as medical benefits provided to employees. The Joint Board has purchased commercial insurance for employee health, property, liability and workers compensation. Industrial Waste Pretreatment Program Regulations - The Joint Board s sewage treatment and disposal operations are subject to regulations and governmental authorities. The complexity of these regulations results in many areas of uncertainty and requires interpretation. The regulatory agencies may question Joint Board interpretations. If the Joint Board s interpretations do not prevail, remedial actions and/or civil penalties could be assessed that could have an adverse effect on the Joint Board s operations. 10

16 Notes to Financial Statements March 31, 2016 NOTE 6 - DEFINED BENEFIT RETIREMENT PLAN A. Summary of Significant Accounting Policies Pensions For purposes of measuring the Net Pension Liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Municipal Employees Retirement System (MERS) of Michigan and additions to/deductions from MERS fiduciary net position have been determined on the same basis as they are reported by MERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. B. General Information about the Pension Plan Plan Description The Joint Board's defined benefit pension plan provides certain retirement, disability and death benefits to plan members and beneficiaries. The employer participates in the Municipal Employees Retirement System (MERS) of Michigan. MERS is an agent multiple-employer, statewide public employee pension plan established by the Michigan Legislature under Public Act 135 of 1945 and administered by a nine-member Retirement Board. MERS issues a publicly available financial report that includes financial statements and required supplementary information. This report may be obtained accessing the MERS website at Benefits Provided 01 - General: Open Division 2014 Valuation 2013 Valuation Benefit Multiplier 2.5% Multiplier (80% Max) 2.5% Multiplier (80% Max) Normal Retirement Age Vesting 10 years 10 years Early Retirement (Unreduced) - - Early Retirement (Reduced) 50/25 50/25 55/15 55/15 Final Average Compensation 3 years 3 years COLA for Future Retirees 2.5% (Non-Compound) 2.5% (Non-Compound) COLA for Current Retirees 2.5% (Non-Compound) 2.5% (Non-Compound) Employee Contributions 3% under $4,200; 5% over $4,200 3% under $4,200; 5% over $4,200 Act 88 No No Employees Covered by Benefit Terms At the December 31, 2014 valuation date, the following employees were covered by the benefit terms: Inactive employees or beneficiaries currently receiving benefits 1 Inactive employees entitled to but not yet receiving benefits - Active employees 4 Total 5 11

17 Notes to Financial Statements March 31, 2016 NOTE 6 - DEFINED BENEFIT RETIREMENT PLAN - Continued B. General Information about the Pension Plan - Continued Contributions The Joint Board is required to contribute amounts at least equal to the actuarially determined rate, as established by the MERS Retirement Board. The actuarially determined rate is the estimated amount necessary to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The Joint Board may establish contribution rates to be paid by its covered employees. The Joint Board's contributions were $37,484 and $38,228 based on annual payroll for open divisions as of March 31, 2016 and March 31, 2015, respectively. Net Pension Liability The employer's Net Pension Liability was measured as of December 31, 2015, and the total pension liability used to calculate the Net Pension Liability was determined by an annual actuarial valuation as of that date. Actuarial Assumptions The total pension liability in the December 31, 2014 annual actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation: 3% - 4% Salary Increases: 4.5% in the long-term (1%, 2%, and 3% for calendar years 2014, 2015 and 2016, respectively) Investment rate of return: 8.0%, net of investment expense, including inflation Although no specific price inflation assumptions are needed for the valuation, the 4.5% long-term wage inflation assumption would be consistent with a price inflation of 3% - 4%. Mortality rates used were based on the 1994 Group Annuity Mortality Table of a 50% Male and 50% Female blend. For disabled retirees, the regular mortality table is used with a 10-year set forward in ages to reflect the higher expected mortality rates of disabled members. The actuarial assumptions used in valuation were based on the results of the most recent actuarial experience study in (MERS Retirement Board is currently conducting an actuarial experience study covering the period from January 1, 2009, through December 31, 2013.) 12

18 NOTE 6 - DEFINED BENEFIT RETIREMENT PLAN - Continued B. General Information about the Pension Plan - Continued Actuarial Assumptions - Continued Notes to Financial Statements March 31, 2016 The long-term expected rate of return on pension plan investments was determined using a model method in which the best-estimate ranges of expected future real rates of return (expected returns, net of investment and administrative expenses and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Long-Term Expected Real Target Rate of Asset Class Allocation Return Global Equity 57.50% 5.02% Global Fixed Income Real Assets Diversifying Strategies Total % Discount Rate The discount rate used to measure the total pension liability is 8.25% for The projection of cash flows used to determine the discount rate assumes that employer and employee contributions will be made at the rates agreed upon for employees and the actuarially determined rates for employers. Based on these assumptions, the pension plan's fiduciary net position was projected to be available to pay all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. C. Changes in Net Pension Liability Calculating Changes in Net Pension Liability Total Pension Plan Fiduciary Net Pension Liability Net Position Liability (asset) (a) (b) (a)-(b) Balances at 12/31/14 $ 1,737,229 $ 1,304,508 $ 432,721 Changes for the Year Service cost $ 29,291 $ - $ 29,291 Interest on total pension liability 146, ,317 Changes in benefits Difference between expected and actual experience Changes in assumptions Employer contributions - 40,061 (40,061) Employee contributions - 11,412 (11,412) Net investment income - (20,014) 20,014 Benefit payments, including employee refunds (43,325) (43,325) - Administrative expense - (2,889) 2,889 Other changes (16,055) - (16,055) Net Changes $ 116,228 $ (14,755) $ 130,983 Balances as of 12/31/15 $ 1,853,457 $ 1,289,753 $ 563,704 13

19 Notes to Financial Statements March 31, 2016 NOTE 6 - DEFINED BENEFIT RETIREMENT PLAN - Continued C. Changes in Net Pension Liability - Continued Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the Net Pension Asset of the Joint Board, calculated using the discount rate of 8.25%, as well as what the employer's Net Pension Liability would be using a discount rate that is 1 percentage point lower (7.25%) or 1 percentage point higher (9.25%) than the current rate. Current 1% Decrease Discount Rate 1% Increase (7.25%) (8.25%) (9.25%) Net Pension Liability as of December 31, 2015 $ - $ (563,704) $ - Change in Net Pension Liability (NPL) 202,634 - (173,752) Calculated NPL for your Notes (361,070) (563,704) (737,456) Note: The current discount rate shown for GASB 68 purposes is higher then the MERS assumed rate of return. This is because for GASB purposes, the discount rate must be gross of administrative expenses, whereas for funding purposes, it is net of administrative expenses. D. Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions For the year ended March 31, 2016, the Joint Board recognized pension expense of $68,761. The Joint Board reported deferred outflows and inflows of resources related to pensions from the following sources: Deferred Deferred Outflows Inflows of Resources of Resources Differences in experience $ - $ - Differences in assumptions - - Excess (Deficit) investment returns 102,282 - Contributions subsequent to the measurement date 10,002 - Total $ 112,284 $ - Amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows: Year ended March 31, Amount 2017 $ 25, , , , ,000 14

20 Notes to Financial Statements March 31, 2016 NOTE 8 - IMPACT OF RECENTLY ISSUED ACCOUNTING PRINCIPLES In June 2016, the GASB implemented Statement No. 68, Accounting and Financial Reporting for Pensions. Statement No. 68 requires governments providing defined benefit pensions to recognize their unfunded pension benefit obligation as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. This net pension liability that will be recorded on the Statement of Net Position will be computed differently than the current unfunded actuarial accrued liability, using specific parameters set forth by the GASB. The statement also enhances accountability and transparency through revised note disclosures and required supplementary information. The Board is currently evaluating the impact this standard will have on the financial statements when adopted. The provisions of this statement are effective for financial statements for the year ending March 31, Due to the accounting change, beginning net position was adjusted by $424,027. NOTE 9 - SUBSEQUENT EVENTS Management has evaluated subsequent events through July 22, 2016, the date on which the financial statements were available to be issued. There were no material subsequent events. 15

21 Required Supplementary Information Schedule of Employer's Contribution Municipal Employees' Retirement System Last 10 Fiscal Years (Amounts were determined as of December 31, 2015) Actuarial Determined Contributions $ 39,541 Contributions in Relation to the Actuarially Determined Contribution 39,541 Contribution Deficiency (Excess) $ - Covered Employee Payroll $ 236,936 Contributions as a Percentage of Covered Employee Payroll 17% Notes to Schedule Actuarial cost method Entry age Amortization method Level percentage of payroll Remaining amortization period 25 years Asset valuation method 10 year smoothed Inflation 4.50% Salary increases 4.50% Investment rate of return 8.25% Retirement age Varies depending on plan adoption Mortality 50% Female/50% Male 1994 Group Annuity Mortality Table 16

22 Required Supplementary Information Schedule of Changes in the Employer's Net Pension Liability and Related Ratios Last 10 Fiscal Years (Amounts were determined as of December 31, 2015) Total Pension Liability Service Cost $ 29,291 Interest Cost 142,742 Changes of Benefit Terms - Difference between expected and actual experience - Changes of assumptions - Benefit payments including employee refunds (43,324) Other (12,463) Net Change in Total Pension Liability $ 116,246 Total Pension Liability - Beginning 1,737,229 Total Pension Liability - Ending $ 1,853,475 Plan Fiduciary Net Position Contributions - employer $ 40,061 Contributions - employee 11,412 Net Investment income (20,014) Benefit payments including employee refunds (43,324) Administrative Expense (2,889) Net Change in Plan Fiduciary Net Position $ (14,754) Plan Fiduciary Net Position - Beginning 1,304,508 Plan Fiduciary Net Position - Ending 1,289,754 Employer Net Pension Liability $ 563,721 Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 70% Covered Employee Payroll 236,936 Employer's Net Pension Liability as a Percentage of Covered Employee Payroll 238% 17

23 Statements of Revenues, Expenses, and Changes in Net Position - Budget and Actual For the Year Ended March 31, 2016 Variance with Final Budget Budgeted Amounts Positive Original Final Actual (Negative) Operating Revenues: Municipal fees $ 757,300 $ 757,300 $ 789,257 $ 31,957 State grants 36,000 36,000 37,800 1,800 Miscellaneous 5,000 5,000 16,382 11,382 Total Operating Revenues $ 798,300 $ 798,300 $ 843,439 $ 45,139 Operating Expenses: Salaries and wages $ 247,200 $ 247,200 $ 248,319 $ (1,119) Payroll taxes and retirement plan 60,450 60,450 93,323 (32,873) Group insurance - health and life 78,000 78,000 79,430 (1,430) Operating supplies and services 153, , ,420 (8,420) Utilities 78,800 78,800 61,731 17,069 Telephone 2,800 2,800-2,800 Depreciation 72,000 72,000 77,000 (5,000) Insurance - liability and workers' compensation 37,000 37,000 27,008 9,992 Repairs and maintenance 30,000 30,000 10,704 19,296 Legal, accounting, and audit services 10,000 10,000 16,904 (6,904) Board meeting fees and employee education 16,000 13,500 9,099 4,401 Other operating expenses 9,450 9,450 4,804 4,646 Total Operating Expenses $ 794,700 $ 792,200 $ 789,742 $ 2,458 Operating Income $ 3,600 $ 6,100 $ 53,697 $ 47,597 Nonoperating Income and Expenses: Interest expense $ - $ - $ (17,855) $ (17,855) Interest income - - 1,013 1,013 Investment income - - 5,050 5,050 Unrealized gain (loss) on investment - - 6,957 6,957 Total Nonoperating Income (Loss) $ - $ - $ (4,835) $ (4,835) NET INCOME (LOSS) FOR THE YEAR $ 3,600 $ 6,100 $ 48,862 $ 42,762 Net Position - Beginning of Year 1,426,760 1,426,760 1,426,760 - NET POSITION - END OF YEAR $ 1,430,360 $ 1,432,860 $ 1,475,622 $ 42,762 18

24 July 22, 2016 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Joint Board Paw Paw Lake Regional Joint Sewage Disposal Board Coloma, Michigan We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the business-type activities of the Paw Paw Lake Regional Joint Sewage Disposal Board, as of and for the year ended March 31, 2016 and 2015, and the related notes to the financial statements, which collectively comprise the Board s basic financial statements, and have issued our report thereon dated July 22, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Board s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Board s internal control. Accordingly, we do not express an opinion on the effectiveness of the Board s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 19

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27 July 22, 2016 Communication with Those Charged with Governance at the Conclusion of the Audit To Joint Board Paw Paw Lake Regional Joint Sewage Disposal Board Coloma, Michigan We have audited the financial statements of the business-type activities of Paw Paw Lake Regional Joint Sewage Disposal Board for the year ended March 31, Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards (and, if applicable, Government Auditing Standards and the Uniform Guidance), as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated June 10, Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by Paw Paw Lake Regional Joint Sewage Disposal Board are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during We noted no transactions entered into by Paw Paw Lake Regional Joint Sewage Disposal Board during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. We noted no estimates that we consider to be particularly sensitive. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. We noted no disclosures that we consider to be particularly sensitive. The financial statement disclosures are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit.

28 - 2 - Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to each opinion unit s financial statements taken as a whole. Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated July 22, Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to Paw Paw Lake Regional Joint Sewage Disposal Board s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as Paw Paw Lake Regional Joint Sewage Disposal Board s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Matters We applied certain limited procedures to required supplementary information, (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. We were not engaged to report on Statements of Revenues, Expenses, and Changes in Net Position - Budget and Actual, which accompany the financial statements but are not RSI. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it.

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